DWC October Atle Elsaas. Working Paper No. 1

Transcription

1 Public Disclosure Authorized DWC-7801 D R A F T October 1978 Public Disclosure Authorized WORKING PAPER ON CENTRALLY PLANNED ECONOMIES Atle Elsaas Public Disclosure Authorized Working Paper No. 1 International Trade and Capital Flows Division Economic Analysis and Projections Department Development Policy Staff Public Disclosure Authorized EPDIT Working Papers report on work in progress and are circulated to stimulate discussion and comment. References in publications to EPDIT Working Papers should be cleared with the author(s) to protect the preliminary nature of these papers. The views and interpretations in a Working Paper are those of the author(s) and should not be attributed to the World Bank or its affiliated organizations.

2 AElsaas:ga 10/30/78 WORKING PAPER ON CENTRALLY PLANNED ECONOMIES Attached is a draft Working Paper on Centrally Planned Economies. It draws on available information and estimates from a variety of sources, not all of which are consistent, and many of the discrepancies cannot easily be explained. Further work is being done by the Vienna Institute for Comparative Economics Study as a consultant for the Bank, and the data and estimates used in the attached paper will be subject to revision. to the indebtedness of the European CPEs. This applies inter alia Furthermore, some of the estimates for changes in trade volume are derived from changes in value and price from different sources, and are probably not "exact". The paper is a draft paper for internal use in the Bank, and should not be quoted or referred to in documents with wider circulation.

3 DRAFT A. Elsaas October 26, 1978 WORKING PAPER ON CENTRALLY PLANNED ECONOMIES I. Introduction and Summary II. European CPEs - Economic Growth and Per Capita Income III. The External Trade of the CPEs a. East-West Trade b. The Overall Trade of European CPEs c. European CPEs: Structure of Imports and Exports d. Balance of Trade and Current Balances by Region e. CPEs - Trade with LDCs and OPEC IV. European CPEs: Trade in Energy and Fuel V. European CPEs: Grain Imports VI. VII. VIII. The Balance of Payments of European CPEs in Transactions with the West Borrowing by European CPEs, Debt and Debt Service Inter-Industry Cooperation Agreements Between East and West Attachment: Statistical Annex

4 WORKING PAPER ON CENTRALLY PLANNED ECONOMIES I. Introduction and Summarv 1. Some work was undertaken on the Centrally Planned Economies in connection with the World Development Report. The purpose of this paper is to bring together the information and insight that was gathered, since this may facilitate future work. 2. Eastern Europe (Bulgaria, Czechoslovakia, the German Democratic Republic, Hungary, Poland, Romania) and the USSR are referred to as European CPEs; the Peoples Republic of China, the Demogratic Republic of Korea and Mongolia are the Asian CPEs. The European CPEs are also often referred to as COMECON or CMEA countries, both abbreviations referring to the Council for Mutual Economic Assistance. Vietnam became a member of COMECON in August 1978, but is not included in the discussion in this paper. 3. The statistical information on CPEs is incomplete and there are discrepancies between estimates from different sources, partly due to the difficulties in establishing an appropriate exchange rate for translating national currency data into US dollars. This paper draws mainly on statistics and estimates made by international organizations (mainly the Economic Commission for Europe and UNCTAD), and by Chase Manhattan Bank and the Vienna Institute for Comparative Economic Studies. The Vienna Institute has as a consultant for the Bank prepared a study on "East-West Trade and CMEA Indebtedness in the 1970s and 1980s". 4. There is a general agreement on the economic tendencies in the CMEA region: they are characterized by a stagnant labor force, and a slowing down of the economic growth despite a high investment ratio. Production growth has

5 -2- to rely on increasing labor productivity, and the emphasis in economic planning is on improved technology. Imports of high technology equipment and turn-key projects from the West is a key element in this. 5. The CMEA countries have during the first half of the 1970's had an unprecedented strong growth of imports from the West: an average growth rate in volume terms of 15%. Exports had in comparison a modest growth. The strong import growth was made possible by improving terms of trade - mainly due to energy exports - and borrowing in the West. The result is a substantial debt, while there are no evident prospects for further improvement of the terms of trade. 6. With the existing debt, exports must in the medium and longer term grow faster than imports, in order to avoid a too high indebtedness. This is the outcome of projections and judgments by the Vienna Institute for Comparative Economic Studies in its report prepared for the Bank. The projections of WDR I are based on similar considerations. For instance, an export growth of 7% per annum might not permit an import growth by more than 4 or 5% (compared with 12.5% in the preceding decade). The arithmetic of the situation is similar to that of many developing countries: with a fairly high initial debt the longer term trend of export growth must exceed that of import growth in order to avoid an "excessive" debt. 7. The imports of the Centrally Planned Economies are - with some time lag - subjeset to direct policy influence, while exports face a marketing problem. Import growth can be adapted to export growth and the external borrowing that the authorities are willing and able to undertake. A low growth of exports and a still lower growth of imports would have an

6 -3- adverse effect on the economic growth of the CPEs, and it is for this reason natural to conclude that the CPEs will make every effort to expand exports. The question is to what extent they will be able to do that, inter alia because an increasing share of the future exports has to consist of manufactures competing with Western products. The economic situation in the West would be of importance. A long term "growth crisis" in the West has by some observers been pointed at as the greatest danger for East- West economic relations. 1/ 8. It is first and foremost Eastern Europe that has to rely on increasing exports of manufactures, the USSR perhaps to a lesser extent. This depends, however, on USSR exports of energy. Exports of energy accounts presently for more than 50% of USSR exports to the West, and the USSR is at the same time an important supplier of energy to Eastern Europe. Doubt has been expressed with respect to the future energy surplus of the USSR. With stagnating or declining energy exports, other exports have to expand strongly in order to maintain a "reasonable" overall export growth. Rich in natural rdsources the USSR has the potential for expanding exports of other "basic products", but the declared intenion in recent trade negotiations has been to expand exports of a broader range of manufactures. 9. Trade with Asian CPEs, LDCs and OPEC countries account for about 36% of the "extratrade" of the European CPEs. The European CPEs had a surplus in this trade, but apparently no net hard currency income from this surplus. While the European CPEs were borrowing in the West, they 1/ Jan Stankowsky: "East West Trade - Dimensions, Problems, Prospects", Europaische Rundschau, 1976, no. 2.

7 -4- were at the same time lending substantial amounts to third parties. This lending includes debt incurred by Vietnam and Cuba, and - according to our interpretation of the data - also the financing of exports of military hardware. Only a minor part of the lending was development assistance according to DAC and UNCTAD definitions. It is possible that the European CPEs had a hard currency deficit in transactions with third parties. Asian CPEs had apparently a hard-currency surplus (exports to Hong-Kong) for the financing of the trade deficit towards the West; Asian CPEs have not been borrowing in the West up to The problem of East-West trade and financial relationships have in recent years been commented upon in numerous articles by Western observers. Part of the problem is that of trade between different economic systems: the East is not an open market and can - it is feared - on the other hand disrupt Western markets through below-cost exports in order to earn badly needed foreign exchange. The system of counterpart trade - used extensively by USSR - has been subject to criticism on similar grounds, since it combines the export interests of Western firms to an obligation to market future deliveries from the East in the West. for a wider range of manufactures. The USSR has sought long term contracts The question of East-West trade has also political overtones, with the broader implications of increasing economic interdependence being judged differently by different observers. 11. It is not clear how the debt situation is judged by the authorities in the East, and to what extent they want to continue with a high level of borrowing. Recent developments (in 1976 and 1977) reflect efforts to step up exports and reduce the import growth, but this may be a short-term

8 -5- adjustment in the wake of a quite substantial deficit. Soviet officials are reportedly not concerned by the present level of indebtedness of the USSR, but the policy is to seek external financing in connection with projects with compensatory deliveries. 12. Western observers have an ambivalent attitude towards the debtlevel of East-European countries. The debt service ratios are high, but lenders seem willing to supply additional credits if a debtor nation should face liquidity problems. It is also felt that the European CPEs will do everything possible to honor their debt servicing obligations, eventually supported by cooperation between CMEA countries. The question of new financial institutions for the financing of East-West economic cooperation has been subject to preliminary discussion in the ECE Committee on Development and trade but so far with a negative result. If the financial side of East- West trade should become more problematic, such ideas may be taken up again. 13. The analyses of the Vienna Institute and the World Development Report assume that the East is willing to undertake substantial borrowing in order to maintain a high level of imports from the West and that the West is willing to supply the finances.

9 II. European CPEs - Economic Growth and Per Capita Income 14. The USSR accounts for about 70% of the combined GNP of European CPEs, and there is a clear tendency for a declining rate of economic growth of the USSR. It is a commonly held view that this is the case also in Eastern Europe, although this is so far less evident. The growth rates in table 1 refers to the Gross Material Product (GMP). 1/ Table 1: EUROPEAN CPEs - GROWTH OF GROSS MATERIAL PRODUCT (GMP) (in percent per annum) Plans Eastern Europe USSR European CPEs Source: Annex table The planned growth targets for are in all countries lower than the actual growth in the preceding 5 years. Actual growth during the two first years of the plans are below the plan average in all East-European countries. 16. The gross investment ratio (to NMP) averaged 30% in USSR in the period It was higher in all East European countries, except the 1/ The Gross Material Product (GMP) is the GDP generated in commodity production and services related to commodity production. These services are referred to as material services. They include repairs, commodity transportation and distribution. The GMP differs from GDP in that personal services, insurance, public administration, defense, education, health services, passenger transport and communication are excluded. The two last activities are in some countries included in the "material sphere" for practical reasons. The Net Material Product (NMP) is GMP minus depreciation.

10 German Democratic Republic (29%). The planned investment ratios show small changes, except for Bulgaria and Poland where the plans aim at a reduction of several percentage points. 17. Past trends in the labor force have been characterized by a slow rate of growth in most countries of the region; USSR and Poland were exceptions (increase by 1.8% and 2.2% per annum over the decade up to 1975). But a large share of the increase in the labor force was absorbed in services, and this tendency is expected to continue. Employment in the "material sphere" I/ is - according to the plans - expected to remain at the 1975 level or to increase at rates significantly below 1% per annum. Increasing labor productivity has to account for virtually all the planned production growth. Increasing capital stock per employed (capital intensity) has in the past been one dominant factor behind increasing labor productivity. Poland and Czechoslovakia succeeded in combining increased capital intensity with increasing capital productivity (declining capital output ratio). Capital productivity has declined in the USSR, and the plan implies that this will continue (capital stock up by 48%, NMP up by 26%, both in the material sphere), in spite of efforts to consolidate investments and shorten the implementation time of new projects. 18. There has in the past been a productivity gain from transfer of labor from agriculture to activities with higher productivity, but this transfer - and the related gain - has declined. The participation rate of the female population has reached the same level as that of the male population, and further increases on this account are not likely. Labor shortage is 1/ Commodity production and material services, see note to paragraph 14.

11 reportedly a problem in all European CPEs, creating difficulties in several activities, especially building and construction. The policy emphasis is on improved technology, labor saving, increased participation of elderly and better economic management. 19. Per capita income (GNP) in as estimated for the World Bank Atlas-is given in Annex table 1. The average per capita income for the European CPEs is close to $2,600, which is of the same order of magnitude as for Ireland and Spain (but only 30% of that of Sweden, topping the list for OECD countries in 1975). The per capita income in USSR was approximately the same as the average for Eastern Europe. There are quite strong variations within Eastern Europe (GDR 47% above the average, Romania 40% below the average). The per capita income in Eastern Germany was - according to these estimates - close to that of the United Kingdom.

12 -9- III. The External Trade of CPEs a. East-West Trade 20. East-West Trade refers to trade between the European CPEs and developed market economies 1/ (in some contexts a more narrow concept, industrialized market economies). 2/ A characteristic feature is a strong upsurge in the imports by the East from the West during the first half of the 1970's. Table 2: EAST-WEST TRADE - RATES OF GROWTH IN VOLUME Exports to the West Eastern Europe USSR European CPEs Imports from the West Eastern Europe USSR European CPEs Source: Annex tables 4 and An import growth rate in volume terms of 15% for the region as a whole over 5 years is by any standard very high. For the USSR the growth rate was 19%, which means that the import volume more than doubled (up by 1/ UNCTAD trade statistics classification, all countries except LDCs, OPEC and CPEs. 2/ Classification in IMF Direction of Trade Statistics. Excludes inter alia Spain, Portugal, Yugoslavia and Finland.

13 %) over the 5 years. The growth of exports was in comparison a modest 4-5%. Comparing the two five year periods there was a decline in the rate of growth of exports and an acceleration in the growth of imports. 22. With constant terms of trade, the result would be a strongly increasing trade deficit. However, both Eastern Europe and USSR improved their terms of trade with the West. Compared with 1970 relative prices, the purchasing power of USSR exports to the West had increased by 40% by 1975, and as much as 54% in This improvement can be ascribed mainly to the rising energy prices; in 1975, energy accounted for about 54% of USSR exports to the West. Table 3: EUROPEAN CPE'S: TERMS OF TRADE IN TRADE WITH THE WEST (1970 = 100) Western Europe (EE) USSR European CPEs (ECPEs) Source: Annex Table Eastern Europe also had a terms of trade gain vis-a-vis the West, a loss on terms of trade vis-a-vis the USSR. The result was that both Eastern Europe and the West had a loss of terms of trade to USSR, mainly as a result of the fact the USSR is a net exporter of energy to both. The overall results in terms of capacity to import are given below:

14 Table 4: EFFECTS OF CHANGE IN TERMS OF TRADE FROM 1970 ON CAPACITY TO IMPORT IN / (change in percent) Change in Capacity to Import for Eastern European Europe USSR CPEs The West Change in Capacity to Import from: Eastern Europe USSR The West Total / Increase in the purchasing power of exports to region in question due to change in "bilateral" terms of trade. 24. What this shows is that Eastern Europe had no net gain on terms of trade when the trade with USSR is also taken into account. It may be of interest to see what the above means for the balance of trade positions. 25. Table 5 shows the importance of the terms of trade changes for the balance in East-West trade. At 1970 relative prices (but at 1976 import price level) the East-West trade would have a deficit of US$12.1 billion. But half of this was "covered" by improved terms of trade because the USS was to some extent in an "OPEC position". 26. Prices in trade between European CPEs lag behind world market prices. Up to 1975 most prices in intratrade were fixed for 5 year periods and renegotiated for each new plan-period. In recent years, this has created

15 Table 5: EFFECTS OF TERMS OF TRADE ON THE TRADE BALANCE IN / (in billion US dollars at 1976 prices) Trade Balance Exclusive Gain from Terms of Trade Terms of Actual Trade Gain Trade Balance Eastern Europe Vis-a-vis: USSR USSR The West Vis-a-vis: Eastern Europe The West European CPEs 2/ / Terms of trade change with 1970 as base year. 2/ Trade balance with the West. a strong disparity between prices in intratrade and extratrade. The trade prices are now, and at the beginning of each year, adjusted to the world market average of the preceding 4 years. b. The Overall Trade of the European CPEs 27. East-West trade constitutes only part of the trade of the European CPE's. The composition of their overall trade is given below:

16 Table 6: EUROPEAN CPE'S: DIRECTION OF TRADE IN 1976 Export Import Balance US$ blns. Percent US$ blns. Percent US$ blns. Exports Intratrade Extratrade With: The West 1/ Others / Developed Market Economies. 28. Trade with the West accounts for only 28% of overall trade on the export side, 34% on the import side. About 55% of the trade was intratrade and 13-16% trade with others, i.e., LDCs, OPEC and Asian CPEs. Further details are given in Annex Table 19. c. European CPEs: Structure of Imports and Exports 29. There are pronounced differences in the structure of the foreign trade of the USSR and of the East European countries. Furthermore, the structure is different in intratrade, extratrade, and in the components of extratrade by region. The structure of exports is given in Table 7, more details are given in Annex Tables 6a through 6c. Trade between the Federal Republic of Germany and the German Democratic Republic is not included, since this trade is not given in the source material (UNCTAD trade statistics). 30. Manufactures account for 50% of the total exports of the region. The share is higher in intratrade (60%), lower in extratrade (37%) and still lower in exports to the West (29%). The share of manufactures in exports

17 from the USSR is lower than that of Eastern Europe in all the specified markets. The lowest share is in USSR exports to the West (13%), the highest share is in exports from Eastern Europe to the CMEA region (USSR and Eastern Europe). The other important item is fuel, accounting for 54% of USSR exports to the West and 26% of the exports to Eastern Europe. Food and agricultural products accounted for 25% of the exports of Eastern Europe to the West (not specified in Table 7; see Annex Table 6c). 31. Another observation is that two thirds of the regions total export of manufactures was in trade within the region (intratrade), and that only 15% went to the West. The European CPEs provided only 2.1% of Western imports of manufactures. The corresponding market share of manufactures from LDCs was 6.5%. Intratrade within the West covered over 90% of Western imports of manufactures. All data refer to The composition of CPE imports by broad categories are given in Table Manufactures represent close to 80% of USSR imports from Eastern Europe, 45.5% in imports from others, inter-alia because food, and agricultural raw materials has a high share (34.4%) in the imports from third parties. 33. The share of manufactures in ECPE imports from the West averages 63.4%, but varies for the different supplying regions, partly because of a high share of food in imports from USA and Canada. 34. Manufactures dominate in the imports from Western Europe and Japan, food and agricultural raw materials in the imports from USA and Canada. The relative importance of the different regions in the extratrade of European CPEs is given in Table 10.

18 Table 7: EUROPEAN CPES: COMPOSITION OF EXPORTS BY MAIN CATEGORIES AND DESTINATION IN 1975 (Percentage share of commodity group in exports) E x p o r t s f r o m: Eastern Eur6pean USSR Europe CPEs Manufactures Share in: Total exports In intratrade /a 60.0 In extratrade Fuel In exports to the West In exports to LDCs /b Share in: Total exports In intratrade In extratrade In exports to the West In exports to LDCs /b Other commodities Share in: Total exports of which: Ores and metals Food & agricultural raw materials Unspecified Total exports /a Approximately the same in exports to USSR and intratrade within Eastern Europe. /b 37.6% of USSR exports to LDCs is not classified by commodity group, and is thought to include manufactures for non-civilian use. Source: UNCTAD Handbook of International Trade and Development Statistics, Supplement 1977.

19 Table 8: EUROPEAN CPES: COMPOSITION OF IMPORTS BY REGION OF ORIGIN IN 1975 (Percentage share of imports from region in question) Manufactures I m p o r t s b y:- Total Eastern European USSR Europe CPEs Share in: Total imports In imports from: European CPEs USSR Eastern Europe Others (extratrade) The West LDCs Food and Agricultural raw materials Share in: Total imports In imports from: European CPEs Others (extratrade) The West LDCs Share of above commodities in total imports Other commodities Share in: Total imports of which: Fuel Ores and metals Unspecified Total imports Source: UNCTAD Handbook of International Trade and Development Statistics, Supplement 1977.

20 Table 9: EUROPEAN CPEs: SHARE OF MAIN COMMODITIES IN IMPORTS BY REGION IN 1975 (Commodity shares in percent) Good and In imports from: Manufactures agricultural raw materials Western Europe Japan USA Canada The West, total La /a Including countries not listed above. Source: UNCTAD Handbook of International Trade and Development Statistics, Supplement Table 10: EUROPEAN CPEs: COMPOSITION OF EXTRATRADE BY REGIONS IN 1975 (In percent of total export and import in extratrade) Region of destination or origin Exports from ECPEs Imports by ECPEs Western Europe LDCs (non-opec) OPEC Asian CPEs Japan USA and Canada Others Total Extratrade Source: UNCTAD Handbook of International Trade and Development Statistics, Supplement 1977.

21 Western Europe accounts for about 55% of the extratrade, followed by the LDCs and OPEC. The exports to USA and Canada were low (US$0.8 billion) compared with the imports from these two countries (US$3.4 billion). The Federal Republic of Germany was - on a country basis - the most important trading partner in extratrade. 36. The main characteristics can be summarized as follows: (a) Fuel looms high in the exports from USSR to the West (54%) and Eastern Europe (26%), and the share of manufactures is accordingly low (26%), especially in exports to the West (12.5%). (b) Eastern Europe is to a much greater extent dependent upon exports of manufactures: close to 80% in exports to USSR and intratrade within Eastern Europe, but only 44% in exports to the West, since food and agricultural raw materials are quite important (25% in exports to the West) followed by energy (18%). (c) The share of manufactures in USSR imports from third parties is relatively low (46%) because of the high expenditures on good and agricultural raw materials (34%). Eastern Europe is less dependent upon food imports (20%) and can allocate more for manufactures (56%). (d) USSR has to import substantial amounts of food and agricultural raw materials from third parties (34% of the import bill), and the share of manufactures is therefore relatively low (46%).

22 The European CPEs want for self-evident reasons to maintain high imports of machinery, technology and equipment from the West. The ability of the USSR to do this is - apart from external borrowing - highly dependent upon exports of energy and the degree of self sufficiency in agriculture. Stagnating energy exports would require a quite rapid expansion of other exports in order to maintain a "reasonable" overall export growth. 1/ "Other exports" would in this context mean manufactures, although it has been argued that the USSR could become a still more important supplier of basic rawmaterials to the West. Western Europe is already to a high extent dependent upon expanding exports of manufactures. The intention of both the USSR and Eastern Europe is to expand the exports of manufactures to the West, which raises question of market access and competition. Another possibility is to earn hard currency in trade with "third parties" for the purpose of financing imports from the West. d. Balance of Trade and Current Balances by Region. 38. The balance of trade is frequently discussed in terms of East-West trade, which in turn is defined differently in different sources. OECD documents cover trade between European CPEs (ECPEs) and OECD countries. The Economic Commission for Europe (ECE) gives balance of payment estimates that cover transactions between ECPEs and industrialized countries exclusive of Japan, and apparently also the exclusion of several South European countries. 1/ Stagnant USSR energy exports to the West over a decade requires an annual growth rate of other expbrts of 9% in order to achieve an overall export growth of 5% p.a. (to the West). A 50% decline in energy exports over a decade would require a 12% growth of other exports in order to have a 5% overall export growth. Imports of food and agricultural raw materials from the West corresponded in 1957 to 52% of the imports of machinery and equipment from the West.

23 The UNCTAD trade matrix gives trade with all developed market economies (DMEs). All these sources exclude trade between the Federal Republic of Germany and the Democratic Republic of Germany. This trade is on the other hand included in the estimates of the Vienna Institute for Comparative Economic Studies. A comparison of East-West trade data and the trade balances according to different sources is given in Annex table 17. It has not been possible to specify the components of the discrepancies in value terms. 39. The UNCTAD export network data have been used in WDR, since they ensure a consistency in trade flows between regions. The imports of one region is determined from the registered exports from others to the region in question. This means, however, that the import data may differ substantially from those registered in national statistics, depending inter alia upon the exchange rates that are used. The export network data has, with some exceptions, been used also in this paper. The resulting trade balances for the European CPEs are given in Table 11,lines I through 3. Line 4 gives an alternative overall trade balance, based on national data converted into US dollars (also by UNCTAD and at a rate of Rouble 0.9 per dollar). These estimates give a much higher trade deficit, a deficit that corresponds more closely to that given in most other sources. Virtually all of the difference (about US$3 billion per year) refers to East West trade. 40. The European CPEs had a deficit in East-West trade and a surplus in trade with third parties. to be the most realistic. The "alternative" overall balance (line 4) appears Taking into account gold sales, interest payments and other current transactions, the accumulated current balances for the years are as shown in table 12.

24 Table 11: EUROPEAN CPES, TRADE BALANCE BY MAIN REGIONS (US$ millions) Balance in East-West Trade -1,640-1,420-7,660-6, Balance in Trade With Others 3,960 2,610 1,970 2,970 Of Which in Trade With: LDCs 2,300 1, ,090 OPEC Asian CPE's ,180 Unspecified Overall Trade Balance 1/ 2,320 1,190-5,690-3, Overall trade balance, alternative estimate 2/ ,096-8,704-6,354 1/ From UNCTAD network of total exports statistics. 2/ From UNCTAD trade statistics. Table 12: EUROPEAN CPEs ACCUMULATED CURRENT BALANCE OF PAYMENT, Current account balance in: (US$ billions) Trade Network Alternative Estimates Estimate Transactions with the West Transactions with third parties Overall current account balance Estimated net borrowing in the West 1/ / Derived from Annex Table 21 and estimated debt at the end of Net borrowing is after deduction for increase in bank deposits in the West.

25 The current account deficit based on trade network data is clearly too low compared with the borrowing in the West. In the alternative estimate, the current account deficit with the West is US$25.3 billion, and much closer to the net borrowing of US$30 billion. There is still an excess borrowing in the West of US$4.8 billion, or $1.2 billion per year. This may reflect net hard currency expenditures in transactions with third parties (on current and capital account). 1/ In any case, the estimates indicate that there has been no net hard currency earnings from third parties in spite of a current account surplus of US$11.5 billion. There must then have been a net lending from European CPEs to third parties in an amount of at least US$11.5 billion in the four years considered. 2/ The lending to LDCs as reported by UNCTAD and estimated by DAC is very modest. 3/ The Secretary General of the CMEA has, however, referred to medium and long term credits from the CMEA countries to developing countries in the order of US$20 billion. 4/ High as this may 1/ Other possibilities are unregistered expenditures and build up of hidden reserves. 2/ The bilateral current and capital accounts between two trading partners need not balance, but there must then be a transfer of a financial claim on a third party, in this context a net hard currency payment. If the European CPEs have been a net lender for more than the current account surplus, then they must have had a corresponding hard currency payment to the borrower (in current or capital transactions). Accepting a hard currency defict of US$4.8 billion, and a current account surplus of US$11.5 billion, total lending could be up to US$16.3 billion. The current account surplus reflects exports of military hardware possibly in the order of US$8-10 billion, part of which is financed by lending. 3/ Net lending in the order of US$250 million per annum according to UNCTAD, see Annex Table 33. 4/ Statement at 31st meeting of the CMEA Council, referred to in Vienna Institute Report, p. 4.

26 seem, it is not necessarily inconsistent with the other estimates referred to above, although only a minor part qualifies as development assistance according to DAC and UNCTAD definitions. This is a tentative conclusion, as the data are not good enough to permit very firm conclusions. 42. The trade balance of the Asian CPEs is similar to that of the European CPEs in that it also shows a deficit towards the West and a surplus in trade with LDCs and OPEC. The data for the Asian CPEs are given in Annex Table 20. The combined trade balances for the Asian and the European CPEs are given in Table 12a. Table 12a: ALL CPEs: TRADE BALANCES BY MAIN REGIONS (US$ millions) Balance in Trade With the West -3,020-4,290-10,380-7,600 Of Which: European CPEs -1,640-1,420-7,660-6,150 Asian CPEs -1,380-2,870-2,720-1,450 Balance in Trade With Others 4,620 3,660 3,510 3,380 Of Which: LDCs 3,490 2,950 2,400 3,160 OPEC ,220 Overall Trade Balance 1, ,870-3,220 Of Which: European CPEs 2,320 1,190-5,690-3,180 Asian CPEs ,820-1, Source: UNCTA network of exports.

27 The trade deficit of the European CPEs towards the West is probably too low, as already discussed. Using the alternative estimates in Table 12, and taking into account gold sales and non-trade current account transactions, we obtain a rough picture of the current balance of payments as shown in Table 13. Table 13: ALL CPEs ACCUMULATED CURRENT BALANCE OF PAYMENTS, Current account balances: (US$ billion) 1/ European CPES Asian CPEs - All CPEs East-West trade Intratrade Third parties of which: LDCs OPEC Overall current balance / Trade balance, other current transactions not known. 44. The overall deficit towards the West was US$33.6 billion, about half of which was "balanced" by a surplus vis-a-vis third parties. The overwhelming part of the surplus of Asian CPEs vis-a-vis LDC is a surplus for the Peoples Republic of China,in trade with Hong-Kong. It is likely that this trade provides net hard currency earnings for financing of the deficit towards the West. While the European CPEs have hard-currency expenditures in transactions with third parties, the Asian CPEs seem to have a hard

28 currency surplus in these transactions. The Asian CPEs have up to 1978 not undertaken any financial borrowing in the West. e. CPEs - Trade with LDCs and OPEC 45. The exports of CPEs (including Asian CPEs) to LDCs and OPEC reached US$14.8 billion in 1976, and this corresponded to 56% of their exports to the West. The percentage was 48% for the European CPEs. The exports of Asian CPEs to LDCs and OPEC exceeded their exports to the West. The aggregates are given in Annex Tables 19 and 20. The country specification for trade with OPEC is given in Table 14. Table 14: EUROPEAN CPEs: TRADE WITH OPEC IN 1975 (US$ millions) Exports Imports Total 2,635 2,268 Unspecified Specified 2,571 1,907 of which: Iraq Iran Algeria Nigeria Libya Other Source: UN Monthly Bulletin of Statistics, June Iran and Iraq are the most important trading partners, followed by Libya on the export side, Algeria on the import side. European CPEs accounted for only 4.6% of total OPEC imports. 47. Country specification for trade with non-opec LDCs is given in Table 15. About one third of the exports to non-oil LDCs is, however, not

29 specified by country of destination. Unallocated exports of about US$2.5 billion are of the same order as exports not specified by commodity group, and the latter is thought to represent military hardware. The trade specified by country can perhaps be interpreted as giving a rough picture of the "civilian trade" with LDCs. The country data are inexact, also because the German Democratic Republic (GDR) in most cases gives only "trade turnover" by country, without specification of exports and imports. The GDR data have been included with the same amount on the export side and the import side, which may of course distort the trade balances by country. Table 15: EUROPEAN CPEs: TRADE WITH NON-OPEC LDCs IN 1975 (US$ millions) European CPEs Export Import- Total 7, Unspecified 2, Specified 5,102 6,819 of which in trade with: Cuba 1,918 2,218 Other LDCs 3,184 4,501 Egypt India Brazil Argentina Morocco Malaysia Turkey Peru Afghanistan Pakistan Other countries /a /a Including errors and omissions. Source: UN Bulletin of Statistics, June 1978.

30 Cuba is by far the most important trading partner, accounting for 38% of the specified exports to non-oil LDCs. It can perhaps be assumed that Cuba received an important part of the non-specified exports. Cuba has an export surplus on the specified transactions, but probably a deficit on overall trade. 49. Other important trading partners (amongst non-oil LDCs) are Egypt, India and Brazil followed by Argentina and Morocco on the import side. The trade with individual LDCs (exclusive of Cuba) exceeded in no case US$1 billion. The European CPEs supplied 5.3% of the total imports of non-opec LDCs. These exports corresponded nevertheless to as much as 38% of ECPEs exports to the West. 50. The exports of Asian CPEs to LDCs amounted to US$2.6 billion in 1975, the exports to OPEC to about US$500 million. Close to 50% of the exports to non-opec LDCs was food, 40% manufactures; 80% of the exports was to South and Southeast Asia. The imports of Asian CPEs from LDCs was less than US$1 billion, the imports from OPEC less than US$100 million. The Asian CPEs had a surplus in their trade with LDCs and OPEC. 51. Compensatory deliveries are used in the coopertion of European CPEs and LDCs, and with the ECPEs as suppliers of machinery, equipmnt and technical services combined with an understanding that payments will be made thro(igh compensatory exports to ECPEs later on. Coproduction based on specialization is also used. There are a large number of joint schemes between USSR and India that envisage a substantial program for exchange of components and parts (machinery, electronics, motor vehicles, textiles). About 65 intragovernmental agreements have been concluded with the aim of stimulating contacts between enterprises in European CPEs and LDCs, partly combined with preferences for LDC exports.

31 The CPEs have--as mentioned--a substantial export surplus in their trade with OPEC and LDCs. It totalled US$16.2 billion for the years About 50% of the surplus towards LDCs and OPEC was accounted for by the Asian CPEs; they had in turn a deficit vis-a-vis the European CPEs. The European CPEs had in the final analyses a current account surplus towards third parties (Asian CPEs, OPEC and LDCs) corresponding to not far from 50% of the deficit towards the West (see Table 13). While the European CPEs is a debtor towards the West, it is in a creditor position towards other regions in an amount of US$20 billion according to the statement of the CMEA Secretary General, already referred to. But only a minor part would qualify as development assistance according to DAC and UNCTAD concepts. The net flow from the Peoples Republic of China to LDCs is in the order of US$300 million per year according to DAC estimates. Their new commitments have been declining, and concerns mainly Vietnam, Morocco, Tanzania and Zambia. The aid from China is - according to the DAC Chairman - "..significant in the light of its level of economic development, the contributions by the USSR and the other industrialized East European countries are in no relation to their economic potential". 1/ 53. To summarize: (a) Trade with LDCs and OPEC looms large in the extratrade of the CPEs: 35% on the export side, 23% on the import side. (b) One country, Cuba, weighs heavily in the total, as does military exports granted that the unspecified exports are military exports. 1/ DAC Chairman report 1977, p. 90.

32 (c) The current account surplus of European CPEs with "third parties" has apparently no provided any net hard currency earnings: the European CPEs have been borrowing in the West and lending to others, including Asian CPEs. Only a limited part of this lending is reflected as development assistance in international statistics and estimates. 54. It should finally be mentioned that the European CPEs had a strong increase in their exports to LDCs and OPEC in 1977 (up 30% in value), with a trade surplus of US$5 billion, compared with US$1.8 billion in the preceding year. This may reflect an effort by European CPEs to earn hard currency on trade with "third parties," but the details behind the aggregates are not yet available.

33 IV. European CPEs: Trade in Energy and Fuel 1/ 55. The trade data in this chapter refers to mineral fuels, lubricants and related products (SITC 3). Production and consumption data refers to total primary energy sources (in standard coal equivalents), trade data for 1975 as given in Annex Table 32, production and consumption data in Annex Table Exports of energy are a dominant factor in the external trade of USSR, and accounted in 1975 for 54% of USSR export value to the West, 26% of the USSR exports to Eastern Europe. It is the gain on terms of trade from increasing relative prices on energy that has permitted a very high rate of growth of USSR imports during the first half of the 1970s. 57. The other observation is that Eastern Europe relies heavily on import of petroleum from USSR. For the period the USSR supplied 95% or more of the petroleum products consumed by Czechoslovakia, Poland and GDR, 77% and 71% for Bulgaria and Hungary respectively. Eastern Europe would be in a difficult situation if these imports were to be substituted by hard currency imports. For the European CPEs combined, the future trade perspectives hinges strongly on the ability of USSR to maintain a fairly high "energy surplus". 58. For all energy sources combined the USSR had in 1975 an estimated surplus of 17%, i.e. production exceeded domestic uses by 17% (see Annex Table 29). The European CPEs had a deficit of 14%, and the combined surplus (USSR and Eastern Europe) was only 8.3%. In the case of stagnating 1/ Further details will be available in the near future from a special study which is being undertaken by the Vienna Institute for Comparative Economic Studies.

34 energy production and a "normal" increase in domestic uses, this net surplus might easily disappear. The situation is aggravated by rather poor prospects for expanded production of conventional energy (coal, oil, hydroelectric power) in Eastern Europe. Finally, it has been speculated that some major USSR oil fields will show a declining return and gradually become exhausted. Some Western observers have on this basis suggested that USSR might become a net importer of oil somewhere during the 1980s. This would mean a fundamental change in the external trade position of the CPEs. 59. On the other hand, the possible "energy crisis" and the means to avoid it has become a priorty issue in CMEA planning. Energy accounts for the major part of the resources earmarked for joint ventures within the CMEA region. All the projects so far agreed upon are located in the Soviet Union, most of them to be completed in 1978 and 1979 (plans), and the participants will receive quantities of energy already agreed upon. The deliveries are fixed for 12 years after the completion of,the projects, and Soviet exports of energy to Eastern Europe would - according to the Soviet Plan - increase at an average rate of 7.2% per annum. Domestic production in Eastern Europe will increase by less - only 3% per annum according to ECE estimates - and total supply by about 3.6% per annum. 1/ New joint projects are likely to be established, and a draft plan for unified electricity grid for the CMEA countries is being prepared. Brown coal will in some countries to an increasing extent be used for electricity production. 60. The Soviet Union is clearly interested in maintaining a high level of energy exports to the West, since energy is the major foreign exchange 1/ Discussed in Economic Survey for Europe 1976, Volume II.

35 earner. The strategy is to place higher reliance on coal, natural gas and other sources, including nuclear energy, for domestic uses, and Eastern Europe is encouraged to do the same. Programs aiming at greatly reducing the use of oil as fuel with a shift towards solid fuel in electricity production, have been adopted in all countries. According to the Plans ( ), 27% of the increment in electricity generating capacity of the USSR would be based on nuclear energy, close to 50% in GDR. It is anticipated that 40% of Poland's energy will be derived from nuclear power by the year It is also argued that there is a substantial scope for energy saving, and a more intensive search for oil is under way. It might for these reasons be possible for the USSR to continue to supply Eastern Europe and at the same time sell in hard currency markets. 1/ 1/ Conclusion reached by H. L. Sawyer, "Soviet Oil and Eastern Europe", ACES Bulletin, Volume XIX, 1977.

36 V. European CPE's: Grain Imports. 61. All European CPE countries have self-sufficiency in grain production as an ultimate target. However, their trade balances in grain deteriorated from the last half of the sixties to the first half of the seventies, as shown below. Table 16: EUROPEAN CPE'S: TRADE BALANCES IN GRAIN (in million tons) Annual Average USSR Eastern Europe European CPE's Source: Economic Survey for Europe in 1976, Volume II. 62. For the last fve year period, the degree of self-sufficiency was 96% for USSR, 92% for Eastern Europe, with an average of 95% for the region as a whole. The Plans assumes a 22% increase in grain production in Eastern Europe (compared with the preceding five years), a 12% increase in USSR. The Plans for Eastern Europe are clearly ambitious. The more modest target of USSR should, according to the ECE estimates, allow for both increased consumption and a surplus. However, the degree of fulfillment depends very much on the amplitude of fluctuations in grain production, determined largely by climatic conditions. Poland had a fairly low degree of self-sufficiency (87%) in the years , and a deficit of 10% to output is apparently expected in the Plan.

37 The value of the net imports of grain for all European CPE's from the West was US$2.3 billion in 1975, about US$1.5 billion for the USSR. 1/ Righ priority is given to self-sufficiency, partly out of foreign exchange considerations. 1/ Economic Bulletin for Europe, Volume 28, p. 91.

38 VI. The Balance of Payments of European CPEs in Transactions with the West 64. The Economic Commission for Europe has made estimates of the balance of payments of European CPEs in their transactions with the West (published in Economic Surveys for Europe and Economic Bulletin for Europe). Interest payments are not specified, they have here been estimated separately and are included in Table 10 as investment income. Table 17: EUROPEAN CPES, BALANCE OF PAYMENTS TOWARDS THE WEST 1/ (million US dollars) Trade Balance Commodities (f.o.b.) -2,836-3,209-8,255-5,951 Non-factor services 1, ,260 Balance on goods and nfs -1,767-2,222-7,345-4,691 Investment Income -1,300-1,540-1,800-2,400 Current Account Balance -3,067-3,762-9,145-7,091 Net Transfers Capital Account -2,718-3,388-8,793-6,691 1/ Industrialized countries exclusive of Japan, and exclusive of trade between East-Germany and West Germany. For additional specification and notes: See Annex Table 18. Source: Annex Table The geographical coverage is not the same as for the UNCTAD data mostly used in this paper. Adding the trade deficit towards Japan, and the deficit of the Germany Democratic Republic towards the Federal Republic of Germany, the accumulated deficit on capital account for the four years is

39 US$26.6 billion, or virtually the same as in the "alterative estimate" of Table 12 (US$25.2 billion). The net borrowing in the West is as mentioned estimated at US$30 billion.

40 VII. Borrowing by European CPE's. Debt and Debt Service 66. The debt of the European CPEs to the West at the end of 1970 has been estimated at US$8.3 billion. This is the gross debt without deduction for hard currency deposits with Banks in the West (not known for that year, but has since 1974 been in the order of US$6-8 billion. The net debt was probably insignificant in The gross debt amounted, however, to US$51.4 billion by the end of 1977, the net debt to US$44 billion. Table 18: DEBT OF EUROPEAN CPES TO THE WEST (in billion US dollars) Gross Debt: Eastern Europe USSR CMEA Banks Total, Gross Debt Hard Currency Deposits of East in Western Banks Net Debt Source: Annex Table 21.